Land leases can still carry worth
Owners of US ranches make allowances for reduced income from leasing to oil drillers
and the Bakken Shale North Dakota — were worthless.
But the same technology that led to booms in these areas, and large lease payments for the people who owned the mineral rights on the land, contributed to the glut of oil worldwide and today’s low prices. That, in turn, means less drilling.
“Oil is too easy to get out of the ground and too easy to find,” said Paul Midkiff, national director of the oil, gas and mineral management group at Wells Fargo Private Bank. “I truly believe it won’t go back up to $100 a barrel.”
Midkiff said there was too much oversupply, which would be used up only “if the global economy kicks it into high gear.”
Yet a great reduction in cash flow for leaseholders has given them an opportunity for estate planning, even if the opportunity is not as great as in past busts.
Clarke Keeshan said his family had set up a family partnership to own its land and mineral holdings. These partnerships allow the people setting them up to get discounts on the assets they are putting in, in the belief that family members would struggle to sell shares in the partnership at full value to outsiders.
Yet, he said, he recently had some of the family’s 10,000 acres of ranch land valued, and it did not reflect the drop in oil prices.
“The value is up on the land even though we’re not removing any oil,” he said. “At some point, the commodity will come back to the point where it will be economical to remove it again.”
And that has been a challenge for estate planners. The existence of fracking has reduced the ability of in appraisers to justify a greatly discounted price for the land and the mineral rights.
“The drilling success for wildcat drilling was 1 in 10 wells,” Midkiff said. “When you’re talking about shale drilling, you’re not going to find dry holes anymore. You’re going to find it and frack it out and have success 9 out of 10 times. That’s changed how we value these things.”
The lower cash flow, though, has scared off some people from estate planning, for fear that if they put the leases into irrevocable trusts, which require them to give up the cash flow, they will not have enough money to live on. That could be shortsighted.
Reversal of fortunes
Allison Elliott, senior wealth planning strategist for Wells Fargo Private Bank, said she worked with a couple in their 50s who were set to do extensive estate planning at the peak of the oil boom. But as oil prices fell, and their lease income with it, they went from wanting to use both estate tax exemptions, which were worth over $10 million, to using one, to not returning her calls.
“By the end of 2015, their net worth was about a third,” she said. “Their cash flow was also cut back by two-thirds. But they’re still well above the estate tax limits.”
Now, she said, they are looking to put $3.5 million worth of leases into trust for their heirs. They got to that point by realising that even if prices stayed low, they would have enough to live on.
“As the money kept rolling in, they started buying things, but they had a safety net first,” she said. “That was where we showed them that their safety net was going to work even if they didn’t get more cash flow.”
Dane E. Crunk, managing director of Syntal Capital Partners, said the people in the production and oil service industries best poised to make it through this downturn were the ones with the lowest debt. And low debt is usually sensible advice for anyone.
But that was more difficult to do in this boom, where production companies asked servicing firms to quickly add employees and equipment, he said.
“Even some of our more savvy service business owners were forced to take on more debt and grow more quickly than they would have done,” he said. “It’s a really sore subject right now, this idea of partnership.”
For oil and gas executives, the drop has been a mixed bag. Jonathan A. Blumenthal, managing director at United Capital in Dallas, said he had clients who retired after working 35 years at companies like ExxonMobil and their retirement packages were good. He said that because interest rates were so low, the sizes of lump sum pension payouts were as high as they had ever been. But executives at other oil companies, like Chevron and BP, which have not been doing as well and are laying off people before they have fully funded their pensions, may find themselves struggling.
“Those defined-benefit plans look like a hockey stick,” he said. “You miss those last five years and it’s impactful.”
For people who thought, seemingly rationally, that they could retire early and the lease income would replace their salaries, the shock has been mighty. In some cases, given their careers in the oil industry, these retirees had other money invested in oil producers and pipeline companies that have lost value.
Blumenthal said the clients who managed the decline in oil prices best were the ones who could imagine other sectors, like rental real estate, where the cash flow dried up when those properties were no longer rented.
“You have to show them what it looks like if they don’t have that income,” he said. “Our process is to show you how the decisions in your life impact the process. You have to make decisions based on the things you can control.”
Yet the best attitude with fluctuating wealth in a cyclical business is to look at it as money to be saved first and spent slowly.
“We never expected to receive this,” Sally Keeshan said. “Even when things are bad, we’re blessed. We’ve always had good jobs.
“We were lucky we had a family member who left this to my mother and my aunt. We never get ahead of ourselves.”